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April 28, 2020

How Rent Income is Taxed? Know all Deduction you can claim in Income Tax

by facelesscompliance in Income Tax

How Rent Income is Taxed? Know all Deduction you can claim in Income Tax

Rent is the only Income which gets 30% Standard Deduction flat (without any expenditure or else), which means if we consider highest tax slab rate of 30% in Income Tax, the effective rate of Income Tax becomes 21%. So if you are earning Rent Rs 100/- you pay only Rs 21/- as tax after considering standard deduction. Further the article highlight all the deduction you can claim when you calculate Income From House property

Income from house property

Rental income is taxable under the head Income from house property if the assessee is having house property and the assessee is the owner of the property. House property means building or land appurtenant thereto. Under Income Tax Act there are two types of house properties the income from which are under the head Income from house property they are as follows:

1) Self occupied house property:

Self occupied property is owned by the assessee for residential purposes. A vacant property is considered as self occupied for the purpose of Income Tax Act. Prior to FY 2019-20, if the assessee owns more than one self occupied property, only property is considered as self occupied property and the remaining house property is considered as let out property. As per amendment made by Finance Act 2019, assessee can consider maximum 2 properties as self occupied property and remaining house property as deemed let out.

2) Let out property

Let out house property is the property which is rented for the whole or part of the year and is considered as let out property for the purpose of Income Tax.

What are the deductions the assessee can claim against Income from House property?

Deductions are the eligible expenses notified by the Income tax act which the assessee can claim against the income in order to reduce his total income and ultimately save his taxes. The following are the deduction under Income Tax Act against the Income from House property:

1) Deduction of Municipal taxes paid:

It means the tax which is recovered by The Municipality or the Gram Panchayat or The Local Authority. It is also known as house tax, property tax or local tax etc. It is allowed as deduction on payment basis i.e. the assessee cannot claim the deduction for outstanding municipal tax. It is allowed only in the hands of the owner of the property. If the municipal tax is given on percentage basis then it should be calculated on municipal value of the house property. For instance if the municipal value of property is Rs. 45,00,000 and the municipal tax is 5% then municipal tax to be paid by assessee is Rs. 22,500 (45,00,000 X 5%)

2) Standard deduction:

As per section 24 of the Income tax act, the assessee will get a deduction of 30% of the Net annual value of the property. This deduction is allowed in place of actual expenditure of property. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower. Therefore, this deduction is irrespective of the actual expenditure you may have incurred on insurance, repairs, electricity, water supply etc. In case of self occupied property the deduction u/s 24 is Nil as the income from such self occupied property is nil.

3) Interest on housing loan:

As per section 24, the assessee can claim a deduction of Rs. 2 Lakhs with respect to the interest on housing loan if the property is self occupied by the assessee, the same treatment applies in case of vacant property. If the house property is rented by the assessee then the assessee gets deduction of the entire interest.

The deduction of housing loan interest is allowed if:

  1. Loan is taken for the purpose of house property i.e. purchase or construction of house property
  2. Loan may be taken from banks, financial institutions etc
  3. Interest is allowed on due basis
  4. Any fresh loan is taken for repayment of earlier loan and earlier loan was taken for the purpose of house property then interest on fresh loan shall be allowed as deduction.

How to calculate Income from house property?

Following the steps to calculate Income from House property:

Step 1) Calculate the Gross annual value of house property:

Gross annual value of the property is calculated as under:

aMunicipal ValueXXX
bFair rentXXX
cHigher of a or bXXX
dStandard rentXXX
e(Lower of c or d) Expected rent XXX
fActual rentXXX
gGross annual value (higher of e or f)XXX

Meaning of above terms:

  1. Municipal value: it is the value of property as per municipality records.
  2. Fair rent: It means rent of property in same locaility. It is also known as reasonable rent
  3. Standard rent: it means rent as per rent control act. It is the maximum amount of rent that can be legally recovered by the owner from tenant.
  4. Actual rent: It is calculated as follows: Actual rent received + Rent receivable + unrealized rent

Step 2 )Deduct municipal tax from Gross Annual Value and calculate Net Annual Value:

Reduce property tax or municipal tax from the gross annual value calculated in step 1. This step calculated the Net annual value of House property

Step 3) Deduction under section 24:

Reduce standard deduction at 30% of Net Annual Value of the property and Interest on housing loan as per section 24.

After the above steps if the resulting value is positive then it is Income from House property and if the value is negative then it is Loss from House property.

Let us Understand with the help of Example

Mr. X is having two house property, one property is used for personal purpose and other property is let out to Mr. Y for Rs. 20,000 per month for 12 months. Mr. X is paying housing loan interest of Rs. 2,10,000 on property self owned and Rs. 2,05,000 on let out property. Mr. X is also paying municipal tax on both the property of Rs. 10,000 per annum. The other details of house property are as follows:

ParticularSelf owned propertyLet out property
Municipal value3,00,0002,00,000
Fair rent3,10,0002,20,000
Standard rent3,00,0002,00,000

Following will be Calculation of the Income from house property in the hands of Mr. X.

 ParticularsSelf owned propertyLet out property
aMunicipal Value02,00,000
bFair rent02,20,000
cHigher of a or b02,20,000
dStandard rent02,00,000
e(Lower of c or d) Expected rent 02,00,000
fActual rent02,40,000
gGross annual value (higher of e or f)02,40,000
hLess: Municipal tax010,000
iNet Annual Value02,30,000
jLess: Standard deduction of 30% of Net annual value0(69,000) (2,30,000 X 30%)
kLess: interest on housing loan2,00,000(2,05,000)
lIncome from House Property(2,00,000)(44,000)

In this case, Mr. X will incur a loss of Rs. 2,44,000 under House property.

Losses from House Property :

  • Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
  • Can be adjusted only against Income from house property
  • Can be carried forward even if the return of income for the loss year is belatedly filed.
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